Tight Mortgage Rules Are Putting Even the Rich in a Pinch

Having trouble getting home financing? You're not alone. Even wealthy people are getting rejected under the tough new lending rules adopted after 2008's housing market crash. Moneyed enclaves are still feeling the impact of tight mortgage money. In the breezy New Hampshire lakes region where "On Golden Pond" was filmed and waterfront homes routinely sell in the $5 million to $10 million range, sales are "brisk" but loan applications are often rejected, says sales associate Jerry Love of Peabody & Smith Realty in Holderness, N.H., on the shore of Squam Lake.

"We don't see deals sail through with the automatic approvals that we used to see," Love says. "And we are seeing plenty of wealthy people turned down on million-dollar loans who would easily have qualified a few years back." The rules may get even tougher under proposals now being considered in Washington designed to cap borrowing as a percentage of income. That will be especially bad news for first-time homebuyers and people with moderate incomes who have the hardest time lining up financing. But even those with millions in assets and high credit scores are being turned down if their income is low. And in a low-rate environment, their investment income counts for less than ever on bank loan applications.

"People with a lot of resources are usually OK getting first mortgages, but they are finding they can't refinance or get funding for a second home," says Tyler Vernon, a loan specialist for Biltmore Capital Advisors in Princeton, N.J. "Of course it's a nice, high-level problem to have. But it's a real problem for retirees in places like the Northeast."

Also, while increasingly stringent income requirements are posing the most barriers, stingy assessments are also a frequent problem for costlier deals, according to real estate agents and lenders. In part, that's because "assessors are protecting themselves because banks have been suing them over mortgage failures that showed inflated values," Vernon says. Costly properties can pose difficulties when assessors try to find comparable sales for estimating what mansions are worth, Love adds.

"Everything has moved to a much more rigorous underwriting environment, and every datapoint in every application is verified, checked and documentation is gone over multiple times," says Michael Fratantoni, vice president of single-family research and policy development at the Mortgage Bankers Association.

People with money are finding ways to buy properties, but in the first go-around, they are finding surprises. "The lenders want income statements. They want to check with employers directly on people's work record, and they want to see people who have been in jobs for awhile," Love says. "That's not something our wealthy buyers can always show."

To be sure, it's first-time buyers and people with moderate incomes who are having the most trouble getting credit, Fratantoni says. But this is a dramatically different lending environment no matter what income strata you are in. The MBA's index on mortgage credit availability has risen slightly over the past year, but it's nothing like it was prior to the crash. The MBA's credit availability index is just two years old. But it calculates that home financing would have been eight times as easy in the years leading up to the housing collapse.

Still, some lending has thawed a bit. The MBA says that there has been some recent easing up on loan requirements, and wealthier borrowers have benefited the most: Even borrowers without high incomes are starting to qualify based on healthy savings and high credit scores alone. "They have a better chance, but not every lender is willing to do that," Fratantoni says. "It might require some shopping around."

But even as the housing market improves, loan originations overall are expected to drop by 10 percent this year versus last, according to the MBA. Banks remain reluctant to part with their own reserves, even though they are flush after five years of easy money from the Federal Reserve. Fratantoni says the change in credit availability reflects the banks' more prudent lending and the elimination of "no-documention" and "interest-only" loans that led to many of the foreclosures in the real estate crash. Also, bad loans of all shapes and sizes are still working their way through foreclosures and court proceedings. Just last month, prosecutors in New Jersey filed charges against one of television's "Real Housewives of New Jersey," Teresa Giudice, and her husband Giuseppe "Joe" Giudice, who were charged with falsifying income data on $2 million in home mortgages dating back to the early 2000s when standards were loose.

Financial regulators are also pushing for controls to avoid the excesses that led to the crash. The new Consumer Financial Protection Bureau has been pushing for a limit on borrowing when a debt-to-income ratio exceeds 43 percent, although Congressional opponents worry it will "reduce access to credit that qualified borrowers need to buy homes," according to a press release issued by members of a House Financial Services subcommittee.

Lending experts say consumers need to be well-prepared to deal with the stringent process when they seek loans. Documentation is important, sometimes in the form of a letter from an employer. People seeking mortgages should also be prepared to shop for deals. Different lenders have much different standards. Down payments are rising for many loans, with 20 percent to 30 percent equity required from private lenders. For those who qualify for FHA loans, the down payment is 3.5 percent, but requirements for the federal lending program are stringent. Two years in a job and a credit score of 620 or better are needed, and costly mortgage insurance adds more than a percentage point to the lifetime cost of the loan. For wealthy buyers, FHA loans don't help much since they are capped at $625,000.

The high-end lending market is slowly recovering, though, and private lenders are extending credit for the well-heeled while avoiding the starter-home set that can borrow through government programs. "It's more work but things are getting done," says Love, whose clients are mostly those with enough money to afford a second home. "We are very busy this summer, and we haven't even gotten to the peak period [at summer's end when people often buy vacation homes.]"

Biltmore's Vernon says his firm has been busy getting loans for wealthy clients who borrow against their investment portfolios. The rate of borrowing in so-called margin accounts has reached near the all-time highs just before the 2008 market crash. That strategy is attractive because such arrangements offer rates as low as 1 percent and sometimes even less, and they require no additional down payment because the banks hold the securities that back up the loans. "It's almost no risk to the banks because the securities are pledged as collateral," Vernon says.

The downside is that if the securities fall in value, the borrower's assets can be liquidated. Vernon says he advises caution and recommends such borrowers keep "back-up emergency funds" like a home equity credit line. The rates can also increase as overnight bank-lending benchmark rates rise.

MBA's Fratantoni worries that a further increase in interest rates could cause problems for borrowers at all income levels. "People's credit has been getting better since the crisis," he says. "But any time you see a rapid increase in rates, anything tied to variable rates has some additional risk." Bankers and consumer advocates find themselves in rare agreement on the issue. Easing loan terms too much could be risky for banks and borrowers.